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Bernanke is happy with his tenure: "my inflation record is the best of any Fed chairman in the post-war period" - Photo credit: Gerald R. Ford School of Public Policy

With murmurs at the FOMC growing louder every time the Fed Chairman and his acolytes express support for ultra-loose monetary policy and continued quantitative easing, Ben Bernanke faced the Senate Banking Committee where he once again defended his tenure as central bank chief. The Chairman told policymakers the “benefits of asset purchases, and of policy accommodation more generally, are clear,” but did note “there is no risk-free approach to this situation.”

Admitting the possibility of spiraling inflation and of destabilizing the financial system, Bernanke said the risk of doing nothing is even worse. The central banker also had time to brag on Capitol Hill, telling the Committee his “inflation is the best of any Federal Reserve Chairman in the post-war period” and taking credit for the improvement in housing markets.

“You called me a dove,” Bernanke said in response to criticism from Tennessee Senator Bob Corker, “well maybe in some respects I am, but on the other hand my inflation record is the best of any Federal Reserve chairman in the post-war period. Or at least one of the best, about 2% average inflation.”

The Chairman of the Federal Reserve went to Capitol Hill ready to tell legislators the Fed’s every attempt to revive the U.S. economy has been adequate. Several rounds of QE have aided in keeping longer-term rates down in an environment where nominal rates are already at 0%, helping “spark [a] recovery in the housing market and [leading] to increased sales and production of automobiles and other durable goods.” The Fed’s new forward guidance, by which rates will remain in the zero-range until unemployment falls below 6.5% and as long as inflation expectations remain anchored at no point higher than 2.5%, have managed to keep a lid on unwarranted price increases.

Emboldened by a 3% increase in real GDP in the third quarter of 2012, Bernanke blamed Q4 weakness on Hurricane Sandy and marked slowdown in defense spending, while adding there isn’t “much evidence of an equity bubble.” Chairman Bernanke even denied a global currency war is underway, despite accusations by emerging market finance ministers that ultra-loose monetary policy is channeling hot money flows that have unfairly strengthen their currencies, while helping to weaken “developed nations’” in order to benefit their exports. He said, according to a transcript by Reuters:

We are not engaged in a currency war, we are not targeting our currency. The G7 put out a statement which is very clear that it’s entirely appropriate for countries to use monetary policy to address their domestic objectives, in our case employment and price stability. Our position is that our expansionary monetary policies, which are being replicated in other industrial countries, are increasing demand globally and helping not only our businesses, but also businesses in other countries that export to us. So it’s not a beggar thy neighbor policy.

The single place in which Bernanke seems to have admitted some weakness is where the market feared it the most: within the FOMC. The latest FOMC minutes revealed an increasingly vocal minority warning of the potential risks of the Fed’s unorthodox, ultra-loose monetary stance, bringing to an end an impressive stock market rally that began last November and saw the S&P 500 gain more than 13%.

Bernanke spent a substantial portion of his prepared remarks, along with Q&A time, addressing these risks. As the balance sheet has ballooned to more than $3 trillion, the Fed’s critics have raised the issue of its exit strategy, noting the central bank may distort the market and set the stage for runaway inflation. Bernanke was aggressive on this issue:

We don’t anticipate having to do that [liquidate a big portion of the Fed's holdings]. […] We could exit without ever selling, by letting it run off and we could tighten policy by raising [the] interest rates that we pay on reserves. That would be one strategy, for example. At any case, we have said we will sell slowly with lots of notice and we will, of course, be offering our forward guidance about rates so that there will not be a shift in rate expectations on the part of the market. […] There is no risk-free approach to this situation. The risk of not doing anything is severe as well. So, we are trying to balance these things as best we can.

The Chairman was forced to address the issue of credit markets overheating, creating excessive risk-taking. “Another potential cost [of our policies] is the possibility that very low interest rates, if maintained for a considerable time, could impair financial stability. For example, portfolio managers dissatisfied with low returns may “reach for yield” by taking on more credit risk, duration risk, or leverage,” he noted. While he acknowledged the Fed’s distortion of public markets, the Chairman said that their attempts to promote a stronger economic recovery outweighed those negative effects.

Market participants were unsure how to read the Chairman’s comment. During the first few hours of the trading day, stocks, which had opened in positive territory, fell hard, even as Bernanke was delivering his prepared remarks. The tide turned around noon, as equities began an impressive comeback, with automakers like General Motors and Ford gaining solid ground, while homebuilders like KB Home, Toll Brothers, and Lennar added to their gains. The yield on 10-year Treasuries followed a similar trajectory, and by 2:12 PM in New York stood at 1.88%, while gold had a solid session and was trading up 1.9% to $1,616.20 an ounce.

What is clear is that Bernanke has shown his cards. The Chairman is fully committed to quantitative easing and record-low rates, and believes monetary policy has aided the recovery substantially. What also sticks out is that his latest round of asset purchases has mobilized a small group within the FOMC that fears possible inflationary and market risks. Bernanke remains in control, but consensus within the central bank will be increasingly difficult to achieve, and the possibility of less support sooner than expected can’t be counted out.

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Distorts? It is downright manipulation! The economy DID NOT get any better in four years and the stock market up over 100%, being at 2X fair value for an economy in the toilet (the PE ratio for the S&P500 tends to 6-8 when the economy is really bad and never was it so bad as now).

The Illicit Fed has the mandate for price stability, not price manipulation! Bernanke needs to be tried on treason and stock market manipulation. It cost us $6 trillion in loss bank interest and inflation just so the responsible poor to middle class lose and the wealthy are coddle. This is a recipe for a revolution, not an economic recovery!

Ben, pay up the $100K you cost me. You encouraged gamblers by going long and trampled upon all those who rightfully shorted this pig market, and most of us wouldn’t even be doing it had you not taken away bank interest! You claim you have the lowest inflation on record, what a laugh! Try the average of 7-8% over the last four years! Include food and energy inflation. These decoupled from the inflation rate excluding these. I am aware that over time the food and energy inflation evened out, but it apparently is not behaving as in the past and thus these must now be accounted for.

We have a real NEGATIVE 10% GDP growth rate when properly accounting for the real inflation rate, the population inflation, and effects due to the federal deficit (think of the percentage of the GDP accounted for by the extra spending).

Economist, Brian Wesbury (First Trust) wrote a piece yesterday entitled “Fed Will Make Excuses About Inflation.” I believe him. He says WHEN inflation exceeds 2% the Fed will make all kinds of excuses for why it’s temporary:

1. Due to commodities. “Core” remains tame. 2. Housing prices are just bouncing back to normal. 3. Actual inflation doesn’t matter because the Fed is FORECASTING 2% or less. 4. It’s ok to slightly exceed 2% because it has to make up for when inflation averaged below target during (recent) past years. 5. Temporary weakness in the dollar or a temporary increase in velocity or the money multiplier. 6. 3-4% inflation is good for the economy. It was ok in the 80′s when Volcker ran the Fed.

Wait ’till Bernanke really begins to dance. It will be something to witness, that’s for sure.

This man is clueless about bubbles. The stock market is in a huge bubble right now, engineered by Bernanke himself. Housing still is in a bubble as it never fully deflated with his manipulation of interest rates.

He couldn’t spot the prior housing or stock market bubbles, or he did and is playing everyone for a fool.

House prices being as high as they are now are also ripe for a revolution, not an economic recovery. Bernanke needs to learn about ratios. The median house price per median income was under 2 in 1960. From 1970 to 1990 it was around 2.5 to 3 and now today it’s at 4! So when the house prices are much too high relative to income, we will get further financial oppression by the wealthy as they don’t care how bad the house price per income ratio and then more will have to rent and have no ability to own.

The housing recovery will occur when the price of homes are REASONABLE in relation to incomes and Bernanke is preventing this from occurring.

Bernanke is doing everything he can to drive this country into a third world status.

Bernanke has admitted in the past that QE and other ultra-loose monetary instruments do erode savings. His justification is that through that monetary stimulus, economic growth and job creation more than offset wealth destruction.

In the presentation, the Fed estimates QE 1 and 2 created about 3 million jobs and added about 3 percentage points to real GDP.

Well folks I’m here to mix it up some. There’s more positive results than anybody is acknowledging. The financial industry was done for, at least all the big banks and financial companies, the economy was falling in on itself and the only real effort to save the economy came from the Fed. The Treasury Secretary was too worried about combining banks and saving them rather than the rest of the economy. The Administration with Congress’ agreement frittered away millions sorry, billions on a stimulus package that was insufficient and misdirected.

I’ll be the first to admit I thought Bernanke was crazy when he kept up the very loose monetary policy he used to flood the financial system with liquidity right after the bang. I wrote him an email to tell him I thought he was holding the flood too long and the crops would rot in the field. The response from a staffer assured me the Chairman was in full possession of his faculties.

As time has passed, I come to understand the what he’s been doing that really should have been done by fiscal policy, but somebody had to do it What he ended up creating was a massive circular flow of funds with a small interest increase between the parts of the flow that assisted the Treasury in it’s banks only recovery effort, kept things very liquid, helped the Treasury fund budget overruns and build a wealth channel for enhancing wealth building in the economy.

The coup-de-grace has been he has finally addressed housing which shold have been the focus of fiscal and monetary policy from the get-go. If you’re running downhill and get to going to fast and start tumbling down the hill and break your leg, but you want to run more, you’ve got to fix the leg before running anymore. I’ve come to understand what Bernanke’s doing and the big trick left is to back out without disruption to markets, which it appears he already has a plan for doing.

I give him credit for being the only rational actor in the whole damn business. Tim Geithner, Larry Summers et al had not a clue how to handle the situation. Say what you will but Bernanke pulled the chestnuts out of the fire for the rest of us.

I believe he did target the housing market from the start, as the did the government’s efforts in general (Freddie and Fannie, buying up toxic assets, etc). Housing had taken quite a hit and it’s taking its time to come back.

In the face of a marked decline of aggregate demand, the public sector (i.e. government) should step in temporarily to make up for it and avoid unnecessary wealth destruction. That’s the Keynesian edict, and if you follow it then Bernanke did do what the federal government should’ve been doing.

On the one hand, it’s even better to stimulate via monetary policy, it could be argued, as it doesn’t add to the deficit and it allows private actors to channel the cheap money. But there is a counter argument.

The Fed may very well cause uncontrollable inflation that’s unexpected (thus not in its own projections) by inflating the money supply in such a dramatic fashion. Also, the Fed’s monetary stimulus is mainly funneling through to financial institutions and credit-worth borrowers.

Yet those suffering the most are households, and specifically those that aren’t credit worthy (particularly those with negative equity on their homes).

There are arguments on both sides, I tend to agree that Bernanke did a good job and monetary support is needed, but I also believe the financial sector and those with higher incomes are being favored, when maybe the opposite is needed.

Back in 2007 when Dow was at 13-14k , gold was 800 odd $. Today, Dow is more or less @ same levels in 2007, and gold is @ 1600$ .. With respect to gold value, Dow has fallen i think 80% over the last decade. Can there be a reversal ? Of course, but that would require a policy change. With the policies like Quantitative Easing, asset buying, its pretty much continuing on the same path as the the previous administration but with higher degree. Until and unless there is a reversal of policy changes, investing in stocks is risky proposition and paper money will continue to lose value.